Any Way You Look at It, It's Up

By JOHN HOLUSHA

Published: September 14, 1997

Correction Appended

IT has been a good year in just about every segment of the real estate industry in the New York metropolitan area. Office vacancy rates are down and effective rents are moving upward. Building sales have been brisk and some eye-popping prices are being
paid.

New construction is under way in midtown, with more to come, and new buildings are rising in New Jersey and Fairfield County as well. Retailers are clamoring for newer, bigger locations. The city's hotels are, for all practical purposes, filled to
capacity.

Along with all this welcome prosperity some brokers and investors are beginning to worry: Is it starting to get too hot?

In 1996, the Insignia/ESG real estate concern counted 8.2 million square feet of office properties that were sold in midtown at an average price of $99 a square foot. In the first seven months of this year, 6.1 million square feet sold at an average that
almost doubled to $183.12 per square foot.

Some properties are above average, of course. A building at 135 East 57th street sold for $313 a square foot, while another at 527 Madison Avenue, at 54th Street, commanded $311 a square foot. The record setter was the triangular tower at 1 Times Square,
which sold for about $1,000 a square foot, but that was more because of its value as a base for signs than its attractiveness as an office building.

''I have not seen anything like this since the 1980's,'' said Peter Hauspurg, the chairman of Eastern Consolidated Properties, which specializes in building sales. ''We are doing twice our normal volume in a frenetic
atmosphere. We're seeing deals done over the asking price.''

Fueling the bidding for properties is the ready availability of capital from sources not present in the last up cycle: real estate investment trusts and investment bankers on Wall Street. ''The Wall Street guys are focusing on real estate as
a way of generating fees,'' Mr. Hauspurg said. ''They are behind these office deals. There is more money around than I have ever seen.''

''Between the REIT's and Wall Street there is an inordinate amount of capital chasing a few deals,'' said Bruce Mosler, an executive director of the Cushman & Wakefield brokerage firm. ''It's driving prices
past what the cash flow justifies.''

The influence of the REIT's was also cited by Richard B. Baxter, a senior managing director at Insignia/ESG. ''There are multiple bids on every property that comes to market,'' he said. ''It's literally a buying
frenzy driven by REIT's new to the market.'' He said the high prices were being fetched by buildings that are almost fully leased and have an assured income stream.

''REIT's are a relatively new phenomenon and in the past they preferred suburban locations to central business districts,'' said John Powers, an executive managing director of Insignia/ESG. ''But now they are larger
and are starting to invest in big-city buildings.'' Mr. Powers noted that because of their structure, REIT's have to grow to meet the performance expectations of investors. Indeed, the single biggest
deal so far this year was the sale of seven buildings, with a total of 5.2 million square feet of space, by the developer and investor Bernard H. Mendik to Vornado Realty Trust, a REIT, for $656 million.

Some of the sales are interesting because of the trends they signal, executives say. ''The sale of 100 Wall Street is an indication of the rebound of the office market downtown,'' said Warren M. Heller, a senior director of Jones Lang
Wooton. Mr. Heller, who is known as Woody, said the trend toward converting downtown buildings to residential use is likely to slow as a result of the increase in office values.

The 29-story building at 100 Wall Street was purchased by the Witkoff Group for $34 million, which at $72 a square foot, would be too steep for a conversion, investment advisors say. Its major tenants are insurance companies and securities firms.

Some of the transactions can be confusingly complex. Mr. Hauspurg noted that the sale of 135 East 57th Street did not include the ground under the building, despite the steep $314 per square foot price paid. ''The ground rent is like a second
mortgage,'' he said. ''It adds about $10 a foot to the deal.''

The sale of 505 Park Avenue, which is a 59th Street, to the Hong Kong-based Glorious Sun group shows the importance of foreign investors in the New York market, he added. Glorious Sun paid $48 million, or a relatively steep $240 a square foot, for the
48 year old, 22-story building that was once part of the Uris family's holdings.

ALTHOUGH some prices being paid for buildings are raising eyebrows, since they can only be economically justified by a steady increase in rental rates, real estate executives say the situation is vastly different from that of the late 1980's. That
is because there has been almost no new construction during the decade.

''This is not the same situation as when the market fell out in 1987,'' said Mr. Mosler. ''You had a huge oversupply of office space then, and that is not the case today.'' In fact, the 48-story, 1.6 million-square-foot
building now being built for the Durst Organization at Broadway and 42d Street is the first major office structure to be started since the 1980's. The most recently completed private office buildings were the
structures at 1540 and 1585 Broadway, which are occupied by Bertelsmann and Morgan Stanley, which were started in the mid 1980s and occupied in the early 1990s.

''We are still on the upside of the cycle, but the question is how high is high and how long is long,'' said Barry M. Gosin, the vice chairman and chief executive of Newmark & Company Real Estate. He said the recovery in demand
for office space was largely being driven by the securities and finance industry and related entities, like law and accounting firms, that resisted hiring large numbers of people until recently despite seven years
of a strong stock market.

''If the Dow drops 20 percent, Wall Street will reduce employment and that will affect real estate,'' Mr. Gosin said. He said that with Wall Street firms backing investors who are paying high prices for properties, ''maybe
the investment banks will be left holding the bag this time.''

Not surprisingly, the managers of those companies think they are astute enough to avoid pitfalls. ''The underlying leasing market in New York is up substantially,'' said Russell Appel, one of the managers of CS First Boston's
Praedium Funds, which specializes in investing in smaller properties. ''And the prices we are paying are well below replacement costs.'' He said the development of public markets for real estate
debt has added liquidity to transactions, thus reducing the amount of funds investors need to buy a property. ''You do not need 50 percent equity anymore; now it is 10 to 30 percent which makes buildings
more affordable.''

One indication of the current strength of the market is the way long-stalled deals are starting to happen.

For over 10 years the building occupying the block bounded by 46th and 47th Streets and Madison and Vanderbilt Avenues has stood empty. Disputes over control of the land and over the availability of air rights to increase the size of what could be erected
on the site prevented development while the market was strong in the 1980's, and the fall in demand for office space in the early 1990's left developers uninterested.

But late in August, the investment banking firm Bear, Stearns & Company announced that it had signed a 99-year lease on the site and would use it to build a 1.1 million- square-foot office tower.

Another prominent building site, the northwest corner of 42d Street and Seventh Avenue, is reported to be the location of a 32-story headquarters for the Reuters news service, to be built in association with the Rudin Management Company.

But new development is expensive and few sites have the tax advantages of the Times Square area. So real estate executives do not expect a burst of new construction. Instead, they say, older buildings in good locations are likely to be acquired and brought
to Class A status for 30 to 40 percent less than the cost of new construction.

One area drawing a lot of attention is part of the old Garment District between Penn Station and Times Square.

''I think that area is going to be like Park Avenue South was in the 1980's,'' said Darcy Stacom, an executive managing director at Cushman & Wakefield. ''The buildings are older, but they are large, with big windows,
and they lay out easily.''

Real estate executives say the area's new image will become clearer if the Ted Bates advertising agency, as expected, signs up for 300,000 square feet in a building on Seventh Avenue between 36th and 37th Streets. The agency is expected to leave
its current quarters in the Chrysler Building.

''We are finally getting positive absorption of office space after years of playing musical chairs,'' said James Meiskin, the president of Plymouth Partners, a tenants' broker. He said a tightening market in midtown will drive
tenants to the other boroughs, suburbs and areas of Manhattan they never previously considered.

''I think you are going to see a lot of renovation in the area between 34th and 40th Street and Sixth Avenue and Broadway,'' he said. ''The area has great mass transit.''

The drive into new areas is expected to be fueled by a tightening market in the established midtown market. According to a report prepared by Newmark, the vacancy rate for both Class A and B properties fell to 8 percent during the first half of the year.
This drove average rents in Class A buildings from $36.19 per square foot to $37.58 per foot, the highest level of the 1990's.

Here is a look at what has happened this year in other segments of the market.

In the Suburbs:
New Construction

New construction is under way in New Jersey and Fairfield County, Conn., while conversions of older Class B buildings and industrial properties to Class A offices predominate on Long Island. Westchester County, disproportionately affected by corporate
downsizing, remains the softest of suburban office markets, brokers report.

''It a great time to be an owner -- finally,'' said Donald Eisen, who specializes in suburban markets for Cushman & Wakefield. ''Rents are up to the point -- the mid $20's in New Jersey, about $35 in Connecticut
-- where new building is possible again.''

Indeed, some people are seeing preliminary indications of rent spikes in places like Stamford, where office space is growing scarce but new building is difficult. ''In Stamford, rents have gone from $22 a foot to over $30,'' said Anthony
E. Malkin, president of W & M properties, which has investments in that city. Such incentives as periods without rent and the amount of interior refurbishing and remodeling paid for by landlords, known as work
letters, are also dropping sharply. ''Free rent has gone from one year on a 10-year lease to zero,'' Mr. Malkin said. ''The work letter has gone from $40 a foot to $10 a foot or take-it-as-it-is.
That looks like a spike.''

Nevertheless, because of the experience of the early 90's, a sense of caution remains. Most new construction under way in Fairfield and Westchester is in the form of buildings designed for and to be largely occupied by a single user, such as the
one being built for Swiss Bank in Stamford and the new headquarters for I.B.M. in Armonk, N.Y. Brokers say developers need to demonstrate they have an anchor tenant occupying at least 50 percent of the space before
they can get financing.

Even buildings billed as purely speculative in New Jersey seem to lease a lot of space early in construction, strongly suggesting the developers were confident they had deals in hand before getting under way. ''Space is tight,'' Mr.
Eisen said, talking specifically about New Jersey. ''You hear brokers tell stories about showing space to a client and calling back a week later and find that it is gone. In some cases landlords are picking
which of several deals they want.''

Retail Leasing:
An Increased Demand

A strong local economy and the boost added by tourist spending has made retailers prosperous. That has led, in turn, to increased demand for store locations and higher prices.

''Rents are up 18 to 20 percent across the board from last year,'' said Faith H. Consolo, a senior managing director of Garrick-Aug Associates, a brokerage specializing in retail space. In some places the contracts for new rentals
that are being signed reflect climbs that are even higher than the overall averages, she said.

''Space in SoHo that was going for $50 to $75 a foot last year is $150 a foot now,'' Ms. Consolo said.

Retail specialists say a big event of the year will be when the managers of Rockefeller Center announce their plans for the redevelopment of the retail space in the famous landmark. Officials of Tishman-Speyer Properties, which is an investor and manager
of the building complex, say they expect to go public with their plans before the end of the year.

Most retail specialists say they expect larger, multilevel stores to replace the single-story shops on the first floor and lower-level concourse. And they expect the center's managers to try to anchor the rearranged space with a big- name tenant,
as they did when they attracted the Christie's auction house to part of a garage building.

''I can't think of a better place for a shopping mall anywhere in the world,'' said Alan Victor, executive vice president of the Lansco Corporation, retail brokers and consultants. ''The location is 100 percent and a
new approach should be the end of years and years of boring nothingness on the ground floor.''

Brokers say the anticipated opening up of the Rockefeller Center retail space mirrors what is happening all over town, as retailers seek larger spaces. ''A few years ago, 2,000 to 5,000 square feet was the norm in Manhattan,'' Ms.
Consolo said. ''Now, it is more like 8,000 to 10,000 square feet. We have to look for two or three stores and try to put them together for one user.''

Brokers say they expect more entertainment companies, such as MGM and Viacom, to join Disney and Warner Brothers in the retail business. They also expect more sports-theme stores, like Nike's temple of sneakers on 57th Street, to come to town.

The need for retail space, in addition to the hot areas along Madison Avenue, in midtown and in SoHo, is helping revitalize previously rundown locations such as on Eighth Avenue between 42d Street and Columbus Circle and near Madison Square in Midtown
South.

Brokers note that the anticipated redevelopment of Eighth Avenue between 42d and 43d Streets, with the Tishman E-Walk entertainment retail project and hotel, and the plans to revitalize the Coliseum site on Columbus Circle, are already promoting development
at sites between, including the conversion of at least one pornography movie house into a restaurant.

''The real sleeper is the Madison Square area between 23d Street and 33d Street,'' said Benjamin Fox, a partner in New Spectrum Realty Services. He noted that the Credit Suisse First Boston investment banking house had agreed to move
into the rehabilitated building owned by Metropolitan Life facing the park between 24th and 25th streets and that new restaurants and rehabilitated hotels are opening in the area.

''The pioneers are already there, the architecture of the buildings is fabulous and the rents are cheap,'' Mr. Fox said. ''That is a formula for a regeneration.''

Although rents approaching $500 a foot for retail properties in super-prime locations like 57th Street and Madison Avenue have been reported, Mr. Fox, for one, warns investors in buildings not to place too much emphasis on the value of ground-floor space.

''It is very dangerous to have investors buying properties based on the value of the ground-floor spaces,'' he said. Faced with a huge rent bill when sales soften, a retailer might decide to declare bankruptcy and walk away from the
deal. ''If the tenant goes bankrupt, the investor could lose the property. We have seen it before.''

Hotels:
Occupancy Rate Rises

New York's hotels are all but full. According to figures compiled by PKF Consulting, which specializes in hotels, the occupancy rate of the city's hotels during the first eight months of this year was 81.0 percent, compared to a rate of 78.9
percent in the comparable period last year.

''We are projecting a full-year occupancy rate of about 83 percent compared to the 1996 rate of 81.6 percent,'' said John A. Fox, a senior vice president of PKF. ''It is unlikely that you will see much of an increase above
this year's occupancy rate because we are already so full.''

With tourism booming and rooms hard to find, hotel operators have plenty of flexibility to increase prices. According to the PKF figures, the average room rate through July of this year was $179.64, a solid 10.4 percent gain over the average of $162.75
in the comparable period of 1996.

The demand is spread all across the price spectrum, according to other researchers. Deluxe, first-class, convention and tourist-class hotels all experienced occupancy gains in the first half of the year, with tourist-class hotels rising to 83.4 percent
occupancy from 74.2 percent during the first half of 1996. Only luxury hotels recorded a slight drop, to 77.5 percent from 77.7 percent, which was more than offset by a 13.4 percent increase in room rates to $236.32
from $208.38.

Given a level of prosperity that most industry analysts say is the best in 20 years, there is a lot of talk about building new hotels and converting existing buildings at least partially for lodging. ''There are 19 hotel projects under development
or in the planning stages in Manhattan, which is an extraordinary number and more than any point in the last eight years,'' said Arthur Adler, the lead New York partner in Coopers & Lybrand's
lodging group.

But for all the talk, few spades are going into the ground. A 244-room Marriott Courtyard is under way on 40th Street between Sixth Avenue and Broadway and a 400-room Embassy Suites is expected to be started by Forest City Ratner Enterprises before the
end of the year in Battery Park City. A Marriott is being built in downtown Brooklyn next tor the Metrotech complex, and several conversions are in different stages of completion.

A new hotel in the Times Square area may be in the works as well. Last week, Planet Hollywood was reported to be negotiating with a European investment group to build a 50 story hotel at the southwest corner of Broadway and 47th Street that would include
its signature restaurant.

Lodging analysts say the high costs of building in New York, and the competition from residential housing, have held down the number of hotel projects. ''It's a red-hot market, but not a lot of hotels are being built,'' said Michael
Fishbin, a hotel consultant with E&Y Kenneth Leventhal.

''In some cases the highest and best use is residential,'' he added. ''The Mayfair was converted from a hotel to condominiums and the St. Moritz is being actively evaluated for conversion as well.''

Table/Map: ''For Office Buildings, Too, The Market Is Hot'' lists some major office-building sales in recent months, as compiled primarily by Newmark and Co. Figures have been rounded, and square-foot figures are approximate. (Sources:
Newmark and Co., Insignia/ESG, Cushman & Wakefield) (pg. 6)

Correction: September 28, 1997, Sunday

A listing in the Residential Sales column on Sept. 14 misstated the area of an apartment at 2000 Broadway in Manhattan and the length of time it was on the market. The area was 1,600 square feet, not 1,500. The duration was a year and nine months, not
just four weeks.